G.R. No.

158635 10/2/20, 2:58 AM

G.R. No. 158635

Republic of the Philippines

SUPREME COURT

SECOND DIVISION

G.R. No. 158635 December 9, 2005

MAGNA FINANCIAL SERVICES GROUP, INC., Petitioner,

vs.
ELIAS COLARINA, Respondent.

DECISION

CHICO-NAZARIO, J.:

The undisputed facts of this case show that on 11 June 1997, Elias
Colarina bought on installment from Magna Financial Services Group,
Inc., one (1) unit of Suzuki Multicab, more particularly described as
follows:

MAKE - SUZUKI MULTICAB

MODEL - ER HT

ENGINE NO. - 834963

FRAME NO. - LTO -067886-RO7-C

COLOR - WHITE1

After making a down payment, Colarina executed a promissory note for

the balance of ₱229,284.00 payable in thirty-six (36) equal monthly
installments at ₱6,369.00 monthly, beginning 18 July 1997. To secure
payment thereof, Colarina executed an integrated promissory note and
deed of chattel mortgage over the motor vehicle.

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Colarina failed to pay the monthly amortization beginning January 1999,

accumulating an unpaid balance of ₱131,607.00. Despite repeated
demands, he failed to make the necessary payment. On 31 October 2000
Magna Financial Services Group, Inc. filed a Complaint for Foreclosure of
Chattel Mortgage with Replevin2 before the Municipal Trial Court in
Cities (MTCC), Branch 2, Legaspi City, docketed as Civil Case No.
4822.3 Upon the filing of a Replevin Bond, a Writ of Replevin was issued
by the MTCC. On 27 December 2000, summons, together with a copy of
the Writ of Replevin, was served on Colarina who voluntarily surrendered
physical possession of the vehicle to the Sheriff, Mr. Antonio Lozano. On
02 January 2001, the aforesaid motor vehicle was turned over by the
sheriff to Magna Financial Services Group, Inc.4 On 12 July 2001,
Colarina was declared in default for having filed his answer after more
than six (6) months from the service of summons upon him. Thereupon,
the trial court rendered judgment based on the facts alleged in the
Complaint. In a decision dated 23 July 2001, it held:5

WHEREFORE, judgment is hereby rendered in favor of plaintiff Magna

Financial Services Group, Inc. and against the defendant Elias Colarina,
ordering the latter:

a) to pay plaintiff the principal sum of one hundred thirty one thousand
six hundred seven (₱131,607.00) pesos plus penalty charges at 4.5% per
month computed from January, 1999 until fully paid;

b) to pay plaintiff ₱10,000.00 for attorney’s fees; and

c) to pay the costs.

The foregoing money judgment shall be paid within ninety (90) days from
the entry of judgment. In case of default in such payment, the one (1)
unit of Suzuki Multicab, subject of the writ of replevin and chattel
mortgage, shall be sold at public auction to satisfy the said judgment.6

Colarina appealed to the Regional Trial Court (RTC) of Legazpi City,

Branch 4, where the case was docketed as Civil Case No. 10013. During
the pendency of his appeal before the RTC, Colarina died and was
substituted in the case by his heirs.7 In a decision dated 30 January

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2002, the RTC affirmed in toto the decision of the MTCC.8

Colarina filed a Petition for Review before the Court of Appeals, docketed
as CA-G.R. SP No. 69481. On 21 January 2003, the Court of Appeals
rendered its decision9 holding:

. . . We find merit in petitioners’ assertion that the MTC and the RTC
erred in ordering the defendant to pay the unpaid balance of the
purchase price of the subject vehicle irrespective of the fact that the
instant complaint was for the foreclosure of its chattel mortgage. The
principal error committed by the said courts was their immediate grant,
however erroneous, of relief in favor of the respondent for the payment
of the unpaid balance without considering the fact that the very prayer it
had sought was inconsistent with its allegation in the complaint.

Verily, it is beyond cavil that the complaint seeks the judicial foreclosure
of the chattel mortgage. The fact that the respondent had
unconscionably sought the payment of the unpaid balance regardless of
its complaint for the foreclosure of the said mortgage is glaring proof
that it intentionally devised the same to deprive the defendant of his
rights. A judgment in its favor will in effect allow it to retain the
possession and ownership of the subject vehicle and at the same time
claim against the defendant for the unpaid balance of its purchase price.
In such a case, the respondent would luckily have its cake and eat it too.
Unfortunately for the defendant, the lower courts had readily, probably
unwittingly, made themselves abettors to respondent’s devise to the
detriment of the defendant.

...

WHEREFORE, finding error in the assailed decision, the instant petition is

hereby GRANTED and the assailed decision is hereby REVERSED AND
SET ASIDE. Let the records be remanded to the court of origin.
Accordingly, the foreclosure of the chattel mortgage over the subject
vehicle as prayed for by the respondent in its complaint without any right
to seek the payment of the unpaid balance of the purchase price or any
deficiency judgment against the petitioners pursuant to Article 1484 of
the Civil Code of the Philippines, is hereby ORDERED.10

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A Motion for Reconsideration dated 11 February 200311 filed by Magna

Financial Services Group, Inc., was denied by the Court of Appeals in a
resolution dated 22 May 2003.12 Hence, this Petition for Review on
Certiorari based on the sole issue:

WHAT IS THE TRUE NATURE OF A FORECLOSURE OF CHATTEL

MORTGAGE, EXTRAJUDICIAL OR JUDICIAL, AS AN EXERCISE OF THE
3RD OPTION UNDER ARTICLE 1484, PARAGRAPH 3 OF THE CIVIL CODE.

In its Memorandum, petitioner assails the decision of the Court of

Appeals and asserts that a mortgage is only an accessory obligation, the
principal one being the undertaking to pay the amounts scheduled in the
promissory note. To secure the payment of the note, a chattel mortgage
is constituted on the thing sold. It argues that an action for foreclosure of
mortgage is actually in the nature of an action for sum of money
instituted to enforce the payment of the promissory note, with execution
of the security. In case of an extrajudicial foreclosure of chattel
mortgage, the petition must state the amount due on the obligation and
the sheriff, after the sale, shall apply the proceeds to the unpaid debt.
This, according to petitioner, is the true nature of a foreclosure
proceeding as provided under Rule 68, Section 2 of the Rules of Court.13

On the other hand, respondent countered that the Court of Appeals

correctly set aside the trial court’s decision due to the inconsistency of
the remedies or reliefs sought by the petitioner in its Complaint where it
prayed for the custody of the chattel mortgage and at the same time
asked for the payment of the unpaid balance on the motor vehicle.14

Article 1484 of the Civil Code explicitly provides:

ART. 1484. In a contract of sale of personal property the price of which is

payable in installments, the vendor may exercise any of the following
remedies:

(1) Exact fulfillment of the obligation, should the vendee fail to pay;

(2) Cancel the sale, should the vendee’s failure to pay cover two or more
installments;

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(3) Foreclose the chattel mortgage or the thing sold, if one has been
constituted, should the vendee’s failure to pay cover two or more
installments. In this case, he shall have no further action against the
purchaser to recover any unpaid balance of the price. Any agreement to
the contrary shall be void.

Our Supreme Court in Bachrach Motor Co., Inc. v. Millan15 held:

"Undoubtedly the principal object of the above amendment (referring to
Act 4122 amending Art. 1454, Civil Code of 1889) was to remedy the
abuses committed in connection with the foreclosure of chattel
mortgages. This amendment prevents mortgagees from seizing the
mortgaged property, buying it at foreclosure sale for a low price and then
bringing the suit against the mortgagor for a deficiency judgment. The
almost invariable result of this procedure was that the mortgagor found
himself minus the property and still owing practically the full amount of
his original indebtedness."

In its Complaint, Magna Financial Services Group, Inc. made the following
prayer:

WHEREFORE, it is respectfully prayed that judgment render ordering

defendant:

1. To pay the principal sum of ₱131,607.00 with penalty charges at 4.5%

per month from January 1999 until paid plus liquidated damages.

2. Ordering defendant to reimburse the plaintiff for attorney’s fee at 25%

of the amount due plus expenses of litigation at not less than
₱10,000.00.

3. Ordering defendant to surrender to the plaintiff the possession of the

Multicab described in paragraph 2 of the complaint.

4. Plaintiff prays for other reliefs just and equitable in the premises.

It is further prayed that pendent lite, an Order of Replevin issue

commanding the Provincial Sheriff at Legazpi City or any of his deputies
to take such multicab into his custody and, after judgment, upon default
in the payment of the amount adjudged due to the plaintiff, to sell said

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chattel at public auction in accordance with the chattel mortgage law.16

In its Memorandum before us, petitioner resolutely declared that it has

opted for the remedy provided under Article 1484(3) of the Civil Code,17
that is, to foreclose the chattel mortgage.

It is, however, unmistakable from the Complaint that petitioner preferred

to avail itself of the first and third remedies under Article 1484, at the
same time suing for replevin. For this reason, the Court of Appeals
justifiably set aside the decision of the RTC. Perusing the Complaint, the
petitioner, under its prayer number 1, sought for the payment of the
unpaid amortizations which is a remedy that is provided under Article
1484(1) of the Civil Code, allowing an unpaid vendee to exact fulfillment
of the obligation. At the same time, petitioner prayed that Colarina be
ordered to surrender possession of the vehicle so that it may ultimately
be sold at public auction, which remedy is contained under Article
1484(3). Such a scheme is not only irregular but is a flagrant
circumvention of the prohibition of the law. By praying for the foreclosure
of the chattel, Magna Financial Services Group, Inc. renounced whatever
claim it may have under the promissory note.18

Article 1484, paragraph 3, provides that if the vendor has availed himself
of the right to foreclose the chattel mortgage, "he shall have no further
action against the purchaser to recover any unpaid balance of the
purchase price. Any agreement to the contrary shall be void." In other
words, in all proceedings for the foreclosure of chattel mortgages
executed on chattels which have been sold on the installment plan, the
mortgagee is limited to the property included in the mortgage.19

Contrary to petitioner’s claim, a contract of chattel mortgage, which is

the transaction involved in the present case, is in the nature of a
conditional sale of personal property given as a security for the payment
of a debt, or the performance of some other obligation specified therein,
the condition being that the sale shall be void upon the seller paying to
the purchaser a sum of money or doing some other act named.20 If the
condition is performed according to its terms, the mortgage and sale
immediately become void, and the mortgagee is thereby divested of his
title.21 On the other hand, in case of non payment, foreclosure is one of

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the remedies available to a mortgagee by which he subjects the

mortgaged property to the satisfaction of the obligation to secure that
for which the mortgage was given. Foreclosure may be effected either
judicially or extrajudicially, that is, by ordinary action or by foreclosure
under power of sale contained in the mortgage. It may be effected by the
usual methods, including sale of goods at public auction.22 Extrajudicial
foreclosure, as chosen by the petitioner, is attained by causing the
mortgaged property to be seized by the sheriff, as agent of the
mortgagee, and have it sold at public auction in the manner prescribed
by Section 14 of Act No. 1508, or the Chattel Mortgage Law.23 This rule
governs extrajudicial foreclosure of chattel mortgage.

In sum, since the petitioner has undeniably elected a remedy of

foreclosure under Article 1484(3) of the Civil Code, it is bound by its
election and thus may not be allowed to change what it has opted for nor
to ask for more. On this point, the Court of Appeals correctly set aside
the trial court’s decision and instead rendered a judgment of foreclosure
as prayed for by the petitioner.

The next issue of consequence is whether or not there has been an

actual foreclosure of the subject vehicle.

In the case at bar, there is no dispute that the subject vehicle is already in
the possession of the petitioner, Magna Financial Services Group, Inc.
However, actual foreclosure has not been pursued, commenced or
concluded by it.

Where the mortgagee elects a remedy of foreclosure, the law requires

the actual foreclosure of the mortgaged chattel. Thus, in Manila Motor
Co. v. Fernandez,24 our Supreme Court said that it is actual sale of the
mortgaged chattel in accordance with Sec. 14 of Act No. 1508 that would
bar the creditor (who chooses to foreclose) from recovering any unpaid
balance.25 And it is deemed that there has been foreclosure of the
mortgage when all the proceedings of the foreclosure, including the sale
of the property at public auction, have been accomplished.26

That there should be actual foreclosure of the mortgaged vehicle was

reiterated in the case of De la Cruz v. Asian Consumer and Industrial

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Finance Corporation:27

It is thus clear that while ASIAN eventually succeeded in taking

possession of the mortgaged vehicle, it did not pursue the foreclosure of
the mortgage as shown by the fact that no auction sale of the vehicle
was ever conducted. As we ruled in Filinvest Credit Corp. v. Phil.
Acetylene Co., Inc. (G.R. No. 50449, 30 January 1982, 111 SCRA 421) –

Under the law, the delivery of possession of the mortgaged property to

the mortgagee, the herein appellee, can only operate to extinguish
appellant’s liability if the appellee had actually caused the foreclosure
sale of the mortgaged property when it recovered possession thereof
(Northern Motors, Inc. v. Sapinoso, 33 SCRA 356 [1970]; Universal
Motors Corp. v. Dy Hian Tat, 28 SCRA 161 [1969]; Manila Motors Co., Inc.
v. Fernandez, 99 Phil. 782 [1956]).

Be that as it may, although no actual foreclosure as contemplated under

the law has taken place in this case, since the vehicle is already in the
possession of Magna Financial Services Group, Inc. and it has
persistently and consistently avowed that it elects the remedy of
foreclosure, the Court of Appeals, thus, ruled correctly in directing the
foreclosure of the said vehicle without more.

WHEREFORE, premises considered, the instant petition is DENIED for

lack of merit and the decision of the Court of Appeals dated 21 January
2003 is AFFIRMED. Costs against petitioner.

SO ORDERED.

MINITA V. CHICO-NAZARIO

Associate Justice

WE CONCUR:

REYNATO S. PUNO

Associate Justice

Chairman

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MA. ALICIA AUSTRIA-MARTINEZ ROMEO J. CALLEJO, SR.

Associate Justice Associate Justice

DANTE O. TINGA

Associate Justice

ATTESTATION

I attest that the conclusions in the above Decision were reached in

consultation before the case was assigned to the writer of the opinion of
the Court’s Division.

REYNATO S. PUNO

Associate Justice

Chairman, Second Division

CERTIFICATION

Pursuant to Article VIII, Section 13 of the Constitution, and the Division

Chairman’s Attestation, it is hereby certified that the conclusions in the
above Decision were reached in consultation before the case was
assigned to the writer of the opinion of the Court’s Division.

HILARIO G. DAVIDE, JR.

Chief Justice

Footnotes

1 Rollo, p. 50.

2 Annex A, CA Rollo, p. 23.

3 Annex I, Rollo, p. 50.

4 CA Rollo, p. 39.

5 CA Rollo, pp. 40-41.

6 CA Rollo, p. 41.
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7 CA Rollo, p. 15.

8 Annex H, CA Rollo, pp. 43-47.

9 Penned by Associate Justice Josefina Guevara–Salonga with

Associate Justices Marina L. Buzon and Danilo B. Pine, concurring;
CA Rollo, pp. 66-73.

10 CA Rollo, pp. 71-73.

11 Rollo, pp. 27-30.

12 Rollo, p. 39.

13 Memorandum for the Petitioner, p. 3; Rollo, p. 87.

Rule 68, Section 2 of the Revised Rules of Court on Foreclosure of

Real Estate Mortgage provides:

SEC. 2. Judgment on foreclosure for payment or sale. – If upon the

trial in such action the court shall find the facts set forth in the
complaint to be true, it shall ascertain the amount due to the plaintiff
upon the mortgage debt or obligation, including interest and other
charges as approved by the court, and costs, and shall render
judgment for the sum so found due and order that the same be paid
to the court or to the judgment obligee within a period of not less
than ninety (90) days nor more than one hundred twenty (120) days
from the entry of judgment, and that in default of such payment the
property shall be sold at public auction to satisfy the judgment.

14 Rejoinder, Rollo, p. 95.

15 61 Phil. 409, 415 (1935).

16 CA Rollo, pp. 24-25.

17 Rollo, p. 88.

18 Luneta Motor Co. v. Dimagiba, 113 Phil. 864 (1961).

19 Macondray and Co., Inc. v. Benito, et al., 62 Phil. 137, 142 (1935).

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20 Act No. 1508 - An Act providing for the Mortgaging of personal

property and for the registration of the mortgages so executed.

Section 3. A chattel mortgage is a conditional sale of personal

property as security for the payment of a debt, or the performance
of some other obligation specified therein, the condition being that
the sale shall be void upon the seller’s paying to the purchaser a
sum of money or doing some other act named. If the condition is
performed according to its terms the mortgage and sale
immediately become void, and the mortgagee is thereby divested of
his title.

21 Bachrach Motor Co. v. Summers, 42 Phil. 3 (1921).

22 59 C.J.S. 482 cited in De Leon Credit Transaction, 1995 Ed., p.

384.

23 Bataan Hardwood Corporation v. Dy Pac and Co., G.R. No. L-

29492, 29 February 1972, 43 SCRA 450.

Section 14, Act No. 1508 of the Chattel Mortgage Law provides:

SEC. 14 The mortgagee, his executor, administrator, or assign, may,

after thirty days from the time of condition broken, cause the
mortgaged property, or any part thereof, to be sold at public auction
by a public officer at a public place in the municipality where the
mortgagor resides, or where the property is situated, provided at
least ten days notice of the time, place, and purpose of such sale
has been posted at two or more public places in such municipality,
and the mortgagee, his executor, administrator, or assign, shall
notify the mortgagor or person holding under him and the persons
holding subsequent mortgages of the time and place of sale, either
by notice in writing directed to him or left at his abode, if within the
municipality, or sent by mail if he does not reside in such
municipality, at least ten days previous to the sale.

24 99 Phil. 782, 786 (1956).

25 Pacific Commercial Co. v. De la Rama, 72 Phil. 380 (1941).

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26 Macondray & Co., Inc. v. Tan, 38 O.G. 2606; see also

Radiowealth, Inc. v. Lavin, L-18563, 27 April 1963, 7 SCRA 804; Vda.
De Quiambao, et al. v. Manila Motor Co., Inc., G.R. No. L-17334, 31
October 1961, 3 SCRA 444, 448-449.

27 G.R. No. 94828, 18 September 1992, 214 SCRA 103, 107.

The Lawphil Project - Arellano Law Foundation

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